Despite drop in commodity prices globally, labor shortages in the U.S. are driving up construction costs, according to new CBRE report
DALLAS (June 21, 2016) – Despite the global collapse of commodity prices – including many key inputs to construction – overall construction costs continue to rise nationwide, according to a new report from CBRE Group, Inc. This is in large part due to labor supply and demand dynamics that first surfaced during the recession and have yet to resolve.
In January 2016, average total construction costs in the U.S. registered a year-over-year increase of 1.8 percent, according to the RSMeans Construction Cost Index (CCI). Since January 2011, the national CCI has increased by an annual average of 2.3 percent, resulting in a cumulative 11.8 percent increase during that period.
“The price of materials is just one driver of overall construction costs. The cost of construction labor tends to be much more variable across geographies and over time, so it typically has a larger impact on overall cost trends,” said Andrea Cross, Americas head of office research, CBRE. “The collapse of the housing market and subsequent recession affected supply-side dynamics for new construction throughout the country, as a substantial number of construction workers left the industry during the downturn and never returned.”
Nationwide, the number of workers employed in construction-related occupations declined by nearly 985,000, or 15.8 percent, between 2005 and 2015, according to the most recent occupational employment statistics survey from the Bureau of Labor Statistics. However, some Texas markets saw gains—Dallas/Ft. Worth construction employment increased by 11.6 percent over the same time period.
“When the number of new construction jobs began to grow without a proportional increase in qualified construction workers, tighter labor markets conditions pushed wages upward,” Ms. Cross added. “The effect was compounded by increased fees from contractors, who charged more not just because they could now afford to be more selective, but also because they were stretched across a larger number of projects and would need to use less-experienced crews for some projects—allocating to those projects more man-hours than would be necessary with the best crews.”
In addition to rising labor costs, while the U.S. Producer Price, Index (PPI) has showed dramatic price drops for many key construction materials including asphalt, diesel and iron and steel products, the overall price of construction materials has not fallen. The decline in some materials has been offset by increases in other construction products (glass, cement and construction sand, gravel and stone). In addition, local materials prices tend to be sticky – supply-chain issues, contract requirements, project timelines and other factors cause price changes to lag broader trends.
“The construction volume we’ve witnessed in North Texas since 2014 is unprecedented and the construction cost increases have not caused our clients to pause or cancel projects. The construction labor force here continues to be resilient; we witnessed a seasonal gain in construction labor in the winter months and now, construction firms continue to put workers in place at a remarkable pace to keep up with demand. Construction material costs in North Texas have steadied in 2016 with the only recognizable price increase seen in concrete,” said Brian Straley, Director of Project Management in CBRE’s Dallas office.
Construction cost increases have outpaced the national average in several major metropolitan areas since January 2011. In the past year, Dallas/Ft. Worth saw a CCI increase of 2.0 percent, just above the national average of 1.8 percent. In contrast, local labor rates in Dallas/Ft. Worth are only 68 percent of the national average, compared to New York, which is at 168.4 percent.
While total construction costs have registered strong increases during the current economic cycle, appreciation has been significantly slower than in the previous cycle. Between January 2004 and January 2009, the national CCI increased by an average of 6.6 percent per year for a cumulative gain of 37.4 percent—more than three times the cumulative 11.8 percent increase from 2011-2015.
The CBRE report, the first in a multi-part series, can be accessed here.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2015 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.
